Chapter 2 (section 1.8.5) presented the rationale for establishing a framework to account for the liabilities and the assets resulting from PPP contracts. In fact, many countries develop specific rules that determine how they should account for and report their financial commitments.
Analyzing the impact of a PPP on the government deficit and debt is thus highly dependent on the rules established according to accounting practices. Such practices indicate whether the PPP asset should or should not be recorded as a public asset in national accounts, and therefore whether the related liabilities should or should not be recognized and recorded as a public debt.
Government-pays PPPs create governmental commitments very similar to direct debt services. The long-term payments to the private partner may be very similar to loan repayment cash flows as seen from the government’s perspective, which are typical of traditionally-procured infrastructure projects. Also, most of the PPP assets in many countries are considered as publicly-owned assets from a legal standpoint. In any case, regardless of the legal framework, there is no doubt that they are significantly controlled by the government (directly or indirectly thorough the contract provisions).
Therefore, there is often a strong case for treating the assets implemented under PPP contracts as public investment for the purpose of accounting treatment, and if the asset is recognized in the government’s accounts it is appropriate that a corresponding liability is also recognized. This would create a gross debt entry on the government’s balance sheet that needs to be incorporated into the overall debt control framework of each country.
The result may be very relevant for the investment decision, especially when the specific country is suffering debt restrictions or the level of public debt is close to or over the relevant government debt ceiling. This may require that the project not be developed, regardless of Value for Money considerations, if the result of the assessment is that the asset should be recorded in national accounts. Conversely, not recognizing PPPs in governmental accounts may create a bias in favour of PPPs as a mechanism to circumvent deficit and/or debt restrictions; this results in assets being developed as PPPs even for projects in which the PPP alternative is less efficient than traditional procurement.
The impact of PPP contracts on public debt depends on the country-specific regulations on public accounts. There are two major international standards that are commonly used around the world, which will be explained below. Some countries, however, adopt their own regulations and in some cases do not consider any impact of PPP assets on their governmental books.
The two common international standards are as follows.
- International Public Sector Accounting Standard (IPSAS) 32 or similar account approaches. Under this standard, when the public party controls the asset it will be regarded as a public asset for accounting purposes. Usually, all government-pays PPPs and some user-pays PPPs will be consolidated in the national accounts;
- European System of Accounts (ESA)95/ESA2010 statistical treatment or similar regulations. Under this standard, when the majority of risks are born by the public partner, the asset will be regarded as a public asset with the corresponding recording of public liabilities. Usually, a user-pays PPP would not be regarded as a public asset (when more than 50 percent of the revenue comes from users) and a government-pays PPP may or may not be registered, depending mostly on risk allocation.